401(k) Roth Deferral Option
- Your retirement plan may include the Roth 401(k) deferral option.
- In a traditional 401(k) plan, contributions are made with pre-tax dollars
- The money is not taxed while it remains in your account, but every dollar
taken out is taxed as ordinary income.
- Contributions to a Roth 401(k) are made with after-tax dollars, so
initially they won't reduce your tax bill. However, the money will grow tax-free,
and all withdrawals after age 59 ½, and where you have maintained a designated 401(k) Roth account
for at least 5 years, will be tax-free.
- In other words: A regular 401(k) plan gives you a tax break on the front end, the Roth 401(k) gives
it to you on the back end. Which offers the bigger break overall depends on how long the money stays in the account,
how much it earns and what your tax rates are when you put the money in and take it out.
- You may contribute to one or both accounts, but you can't switch money from one plan to the other after it goes
in.
- Also, you may not double your contribution by having both types of 401(k) accounts.The same
contribution limit will apply to either account, or both combined.
- If your employer provides a
matching contribution, the match must be put into a regular 401(k) account -- subject to the regular
401(k) rules -- even if you are directing all of your contributions into a Roth 401(k).